Any well-diversified portfolio involves multiple layers of informed decision making. If you have decided to allocate a certain part of your portfolio to mutual funds, you should consider allocating a certain proportion of that share to debt funds. And once that decision is made, it is important to identify the best debt funds that suit your financial goals.
To figure out what the best debt funds for your portfolio are, you need to consider some of following aspects:
There are different types of debt funds, each with its own degree of risk. Your fund choice should be based on your risk appetite. Gilt funds that invest in government securities are at the lower end of the risk profile while credit risk funds that invest in corporate debt represent a higher risk profile.
Returns also vary from one debt fund to another, because no two debt funds have the exact same portfolio. The returns will vary based on the proportion of the corpus invested in debt instruments and the type of debt instruments chosen. For example, gilt funds may offer lower returns than corporate bond funds.
Ensure that the debt funds you invest in have durations that match your investment horizon. A long term debt fund will not be ideal for a short term goal, just like as a liquid fund may not be ideal for a long term goal.
Expense ratio is the total annual fee that you need to pay to the mutual fund house expressed as a percentage. Lower the expense ratio, the more cost effective the fund. In India, the expense ratio for mutual funds has been capped at 2% of the net assets of the fund.
Broadly speaking, the best investment options in any category need to have a good risk-return balance. So, with that in mind, here is a list of the best performing debt mutual funds that also give you the benefit of low levels of risk (as on May 31, 2022).
This is not an exhaustive list and you should do your own research to identify what suits you goals.
The bottom line is that each investor’s needs are different. What may be the best debt fund for you may not be suitable for another investor — and vice versa. Nevertheless, no matter which kind of debt fund you choose, you can benefit from selecting the best performing debt mutual funds within that category. Although past performance may not guarantee future returns, it can help you get a fair idea of what funds to shortlist for your portfolio.
There are different types of debt funds, and the rate of returns vary from one fund to another. Typically, credit risk funds have the potential to deliver higher returns, because they invest in corporate bonds that carry a lower credit rating, implying greater risk, but offer a higher interest.
Yes, starting a Systematic Investment Plan (SIP) to invest in the best debt funds can be very beneficial to you for many reasons. You can invest smaller sums periodically instead of getting a larger sum ready, meaning that you can start investing sooner rather than later. You get the benefit of rupee cost averaging, which ultimately brings down your overall investment cost. In addition to this, with an SIP, you can also enjoy the benefits of compounding.
Yes, debt funds can sometimes give you negative returns. This is more commonly seen in the case of long term debt funds that have investment horizons of 7 or more years. When the interest rates in the economy rise, the value of long term bonds go down, since they will continue to carry older and lower interest rates. Debt funds that invest in such bonds may, as a result, record negative returns.
That depends entirely on your specific financial goals. If you want to invest for a long term goal, then the best debt funds for your portfolio may be one that has a tenure of 5 or more years. But if you want to build an emergency fund or simply park your funds in a safe haven while continuing to earn stable returns, short term debt funds may be ideal.
Debt funds can be a safe option to invest in for your short term goals. That said, no investment is completely risk averse, it's important to look into interest rates, and long and short term goals before investing.
On an average, debt fund maturities can range between 3-7 years but this changes according to the investment plan and fund you're looking into. Some debt funds may focus on short term securities and some might on long-term ones. Maturity periods can then range between 1-10 years, based on the type of fund you choose.
.jpeg)
.jpeg)
.jpeg)
